Chancellor Jeremy Hunt today set out plans to fill a £55 billion hole in the government’s finances through a combination of tax rises and spending cuts.
The deficit was created by former Chancellor Kwasi Kwarteng’s now infamous mini-Budget, which sparked chaos in the financial markets and led to a steep increase in government borrowing costs.
Just under half of the £55 billion will come from tax rises, with just over half coming from cuts to government spending, Hunt said.
He added that once the UK’s economy had recovered, the pace of fiscal consolidation would be increased, to reduce pressure on the Bank of England to raise interest rates.
What’s the big picture?
The Office for Budgetary Responsibility (OBR), which provides independent analysis on the government’s finances, confirmed that the UK is already in recession.
But Hunt said the OBR expects the downturn to be shallower as a result of the measures in the Autumn Statement.
The OBR forecast the economy will grow by 4.2% this year, before contracting by 1.4% in 2023, with growth recovering to 1.3% in 2024.
Meanwhile, inflation will average 9.1% this year, before starting to fall steeply from the middle of next year.
Unemployment is expected to rise from its current rate of 3.6% to reach 4.9% in 2024, before falling back to 4.1%.
Which taxes are going up?
Income tax
The Chancellor announced that the thresholds at which the different rates of income tax kick in will be frozen at their current level for six years.
This means the basic rate of 20% will be charged on all earnings over £12,570 until April 2028, while the 40% rate will be charged on earnings over £50,270 until the same date.
Meanwhile, more high earners will be pulled into the top rate of income tax, with the level of income on which the 45% rate is charged being reduced to £125,410 from £150,000 now.
The move will cost those earning more than £150,000 around £1,200 a year.
The thresholds for National Insurance for individuals will also be frozen.
Stamp duty
Kwarteng’s increase to the threshold at which stamp duty is paid to £250,000 was one of the few mini-Budget measures that were not reversed by Hunt when he took office.
But he announced today that the increase will be temporary, with the threshold falling back to its previous level of £125,000 after 31 March 2025.
The threshold for first-time buyers will also be cut to £300,000 from £425,000, on properties costing up to £500,000, rather than £625,000.
He justified the measure by saying that activity in the housing market was expected to slow down over the next two years, and reverting back to the former stamp duty threshold in 2025 would encourage people to bring forward purchases.
The move will cost people purchasing a home for more than £250,000 an extra £2,500 in higher stamp duty payments.
Zoopla's Executive Director of research and insight, Richard Donnell, says: "The government's announcement of a reversal of the recently announced stamp duty changes in 2025 signifies a real need to reform stamp duty - a tax that is now starting to resemble income tax where it's the top tax bands generating the greatest receipts.
"This reversal will make it increasingly difficult for prospective first-time buyers to get on the housing ladder in the coming years, particularly in London and the South East which accounts for the majority of stamp duty receipts."
Council tax
Hunt has lifted the cap on council tax increases to give local authorities more freedom to raise cash.
Local authorities will now be able to raise council tax by up to 5% without having to hold a referendum on their plans.
The impact of the move will vary from council to council, as well as according to individual property bands, but it could see the average amount charged on a band D property rise from £1,966 to as much as £2,064.
Capital gains tax
Capital gains tax is charged at a rate of 18% on residential property and 10% on other assets for basic rate tax payers, and 28% and 20% respectively for higher rate taxpayers. But the first £12,300 of gains are tax free.
However, Hunt announced today that he was reducing the tax-free threshold to £6,000 from April 2023, and to £3,000 from April 2024.
The move will impact investors who sell buy-to-let properties, but the tax is not charged on the sale of people’s main home.
Inheritance tax
The threshold at which inheritance tax starts has also been frozen at its current level of £325,000, although couples can still combine their allowances and assets left to a spouse or civil partner will not be liable for the tax.
In another blow for people planning to leave their family home to their children, the Chancellor also announce the introduction of a cap on social care costs would be delayed by two years.
The cap had been due to come in to force in October 2023, and would limit the total amount individuals had to spend on social care as they aged to £86,000, after which the state would step in to foot the bill.
The cap would have reduced the number of elderly people who had to sell their family home to pay for care.
What support is available?
Hunt had previously warned that the Energy Price Guarantee, which limited average household energy bills to £2,500 a year would be reviewed at the end of March, sparking concerns that it could be scrapped altogether.
But there was good news for struggling households, with Hunt saying it would remain in place but be increased to £3,000 a year for a further 12 months.
Although the move will cost the typical household an additional £500 a year, the sum is significantly less than they would have to pay if the guarantee was abolished altogether.
He also announced that people on means tested benefits would receive a one-off £900 cost-of-living payment, while pensioners would get £300, and those on disability benefits would receive £150.
In addition, the state pension and means tested benefits will be increased by 10.1%, in line with the level of inflation as measured by the Consumer Prices Index in September.
People who rent their home from a social landlord will have rent increases capped at 7% for 2023/24.
What does this mean for the mortgage market?
It’s too early to say how financial markets will react, but the statement is expected to reassurance them after the chaos caused by the mini-Budget.
Not only does Hunt set out exactly how he plans to fill the government’s budget deficit, but he has also published the OBR’s response to his plans.
The interest rates charged on fixed rate mortgages had already fallen before today’s statement, and they are likely to continue their downward trend following it.
Hunt’s announcement that the rate at which fiscal consolidation would take place would increase once the economy returned to growth also means the Bank of England will be under less pressure to raise interest rates, which is further good news for mortgage rates.
